Governance is Critical to Successful Investing in Asia March 2020 - - PowerPoint PPT Presentation

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Governance is Critical to Successful Investing in Asia

March 2020

Jonathan Wu – Executive Director | Chief Investment Specialist

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Disclaimer

This presentation is prepared by Premium China Funds Management for general information only and does not constitute a prospectus, an offer or an invitation to subscribe to any securities, or advice in relation to any securities or financial products. It does not take into account the investment objectives, financial situation or needs of any person. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making any investment decisions. The comments contained herein are expressions of belief only and should not be relied upon as authoritative or without the recipient’s own independent verification or in substitution for the exercise of judgment by any recipient, and are subject to change without notice. Premium China Funds Management is the trading name of Premium China Funds Management Pty Ltd ABN 98 113 856 214, ACN 113 856 214, Australian Financial Services Licence No. 291570. Equity Trustees Limited (“Equity Trustees”) ABN 46 004 031 298, AFSL No. 240975, is a subsidiary of EQT Holdings Limited, a publicly listed company on the Australian Stock Exchange (ASX:EQT), is the Responsible Entity and issuer of units in the Premium China Fund, Premium Asia Fund, Premium Asia Property Fund and Premium Asia Income Fund. The information is taken from sources which are believed to be accurate at the time, but neither Premium China Funds Management, Equity Trustees, Value Partners, nor any of its related parties, its directors or employees, provide warranty of accuracy or reliability in relation to information contained in this presentation, or accepts liability to any person who relies on it. Past performance is no indication of future performance. Unless expressly stated, none of the information should be taken to be a recommendation. Investors should consider the Product Disclosure Statement (PDS) relating to each Fund in deciding whether to acquire or continue to hold units in the Fund. The PDS is available from www.premiumchinafunds.com.au.

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A Pragmatic Perspective on ESG in China

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A Pragmatic Perspective on ESG in China

• The practicalities of ESG investing is a 1st world

issue.

• For China, the evolution of this concept is

prefaced only by bringing a majority of the general population out of poverty first.

• The result of this has led examples like:
• Before: 30 years ago, you didn’t know

where you would get your next meal, no wealth to protect.

• Now: With the growth of the middle

class, protecting your wealth via life insurance is critical.

• Evolution timeline:
• Focus 1 – Social – Bringing people out of

poverty.

• Focus 2 – Governance – Evolution of

Companies from simply growth to sustainable growth.

• Focus 3 – Environment – Sustainable

manufacturing and services.

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• The Right business, run by

the Right people, and at the Right price

• Companies with quality

fundamentals trading below their intrinsic valuations

• Prefer contrarian and

non-consensus ideas

• Highest conviction ideas

driven by our “walk-the- extra-mile” bottom-up fundamental analysis

• Alpha seeking and

absolute return oriented

• On-the-ground, in-depth

360 degree review of companies

• Dedication and insight to

the local market through extensive relationships

• Thorough audit and due

diligence checks

6500+ company visits

Investment philosophy

Value

Bottom-up stock picking Hunt for the 3Rs

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Experience: Stability: Strength:

An average of 18 years of industry experience and 10 years at Value Partners Most team members joined the firm at the beginning of their investment careers Among the best investment teams in Asia with ~70 on-the-ground investment professionals in Hong Kong, mainland China, Singapore and United Kingdom, with a special focus on the Greater China market

Experienced and close-knit investment team

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Investment process overview

Quantitative Team

• Big-Data analysis
• Quantitative market trend signals

An alpha seeking portfolio supported by in-house financial models

Initial idea generation Walk-the-extra- mile fundamental research High conviction idea pool

• Gather the best-of-

breeds value ideas

• Target top 5 ideas per

sector

• Routine review and

discussion to ensure constant idea quality

Portfolio construction

• Concentrated portfolio
• Value portfolio with VP’s

highest conviction ideas

• High active weight
• Deep dive company

analysis to explore under- valued stocks

• Cross-checking &

maintenance

• Management quality and

corporate governance

Multi-Asset Team

• Global multi-asset views
• Macro risks / drivers
• Country allocation ranking

Supported by

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• Team approach - Idea

generation by sector leaders / analysts

• All-cap and bottom-up

focused

• In-house quantitative

screening to provide stock universe overview

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β

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Investment process remains unchanged in the previous 12 months and two enhancements were implemented:

1.

Evaluation of paper portfolio

• We have integrated Bloomberg with trading system, Charles River IMS (CRIMS)
• Analysts can build their paper portfolio on CRIMS where their portfolio performance can be evaluated

and tracked

• CRIMS provides a real time and accurate calculation on prices, also the sector leaders can assess the

analyst’s ability of stock picking

2.

Risk Management

• Risk management system upgraded to Axioma from RiskMetrics in May 2019. This had enhanced the

efficiency of assessing portfolio level risk includes using multiple Value at Risk (VaR) and stress-testing

3.

ESG Integration

• Became a signatory to the UN PRI in July 2019
• Engaged an independent ESG research and data provider
• Integrate ESG in the investment decision-making process via a negative screening process
• Active engagement with the main focus on management through the data sourced from the ESG data

provider or via internal research on significant violation of ESG issues

Enhancements to investment process

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Human Resources as part of ESG process

Board of Directors ESG Spoonsors: Leadership Committee (co-Chairman, co-CIO’s, President) ESG Champion: (co-COO) Patricia Cheung ESG Committee: Dedicated Responsible Investment Staff: Frank Tsui & Ella Wong Fund Managers: Man Wing Chung & Gordon Ip Co-COO’s: Roger Hepper & Patricia Cheung CFO & Investor Relations: Icy Wong Chief Compliance Officer: Vivienne Lee Chief Strategy Officer & marketing: Angel Teng Firmwide Participation Oversight & Implementation Oversight Implementation Firmwide Participation

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Guangzhou R&F Properties (2777.HK)

Background:

• Guangzhou R&F Properties (R&F) is a leading comprehensive property developer in China. The company
• perates its business through four segments: Property Development, Property Investment, Hotel Operations

and Others. It operates its business in domestic and overseas market. ESG Issues:

• Environmental issues: R&F violated the national legislation on atmospheric pollution and is accused of

causing various environmental damage. In May 2019, its sales of property in Hainan Province was suspended as local government discovered that the project has destroyed mangroves in protected areas.

• Social issues: R&F also violated the occupational health and safety regulations in its construction projects.

One of the causes came from the company’s Nanchang construction project, which was suspended in March 2019 after a fatal accident of its worker and failure to comply with the work safety regulations set by the authority. Our action taken: We put the stock into our ESG exclusion list in 2019 after review. Key Metrics Market Cap (in USD) 5.5 billion P/E* 2.7x P/B* 0.4x ROE* 12.6% D/Y* 14.4% Guangzhou R&F Properties share price since 2016

5 7 9 11 13 15 17 19 21 23 25 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20

Source: Bloomberg FY2020 estimates, as of 24 February 2020

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RATCH Group (RATCH.BK)

Background:

• RATCH Group is a leading independent power producer in Thailand. Its business primarily focuses on fossil

fuel power generation, renewable projects and businesses adjacent to electricity generation and energy both in Thailand and internationally. ESG Issues:

• Environmental issues: In July 2018, the collapse of RATCH Group’s Xe-Pian Xe-Namnoy hydropower project in

Laos released 500 millions tons of water from the dam. The accident brought damage to fish stocks, soil fertility, thus loss of land and livelihood in both Laos and Cambodia. RATCH’s management was criticized for its inefficiency to handle the damage before and after incident.

• Social issues: The same accident led to social issues as the collapse of the dam killed 71 people and caused

communities to lose their livelihoods and suffer from physical and mental health issues. Conclusion: We put the stock into our ESG exclusion list this year after review. Key Metrics Market Cap (in USD) 3.0 billion P/E* 13.4x P/B* 1.4x ROE* 10.0% D/Y* 3.9% RATCH share price since 2016

30 40 50 60 70 80 90 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20

Source: Bloomberg FY2020 estimates, as of 24 February 2020

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Premium Asia Fund Fee Reduction & Performance

Data as at 31 January 2020 Source: Link Fund Solutions, Macquarie Investment Management Limited, Bloomberg Inception Date: 1 December 2009. Past performance is not indicative of future results. *Refers to inception of Premium Asia Fund starting first full month, which is 31 December 2009. ^Peer average comprises of: Platinum Asia Fund, Fidelity Asia Fund, Aberdeen Standard Asian Opportunities Fund, T. Rowe Price Asia Ex-Japan Equity Fund, BT Asian Share Fund (Retail), Nikko AM New Asia Fund, Pendal Asian Share Fund, K2 Asian Absolute Return Fund, Antipodes Asia Fund, PM Capital Asian Companies Fund.

Fee reduction from 1st July 2019 - Competitive fees:

• Performance fee removed
• Management fee reduced to 1.33% p.a.
• PDS in market from 1st July 2019

Performance continues to be outstanding

1 month 3 months 6 months 1 year 3 year p.a. 5 year p.a. 7 year p.a. 10 year p.a. *Since Inception Annualised return Annualised volatility Premium Asia Fund

• 1.5%

2.3% 4.8% 19.3% 13.8% 9.4% 12.5% 11.6% 195.2% 11.2% 12.8% MSCI AC Asia-ex Japan Index 0.3% 5.2% 6.9% 14.6% 13.5% 8.3% 11.7% 9.3% 142.9% 9.1% 11.1% Excess return

• 1.8%
• 2.9%
• 2.1%

4.7% 0.3% 1.1% 0.8% 2.3% 52.3% 2.1% Peer Group Quartile 4th 3rd 3rd 2nd 1st 1st 1st 1st 1st

• 50%

0% 50% 100% 150% 200% 250% Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Cumulative Returns

Premium Asia Fund MSCI AC Asia ex Japan Peer Average

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• Investment objective

To generate positive returns, consisting of both capital growth and income, over a three to five year period prior to accounting for movements in currency exchange rates.

Premium Asia Fund

• Fund Facts

Fund Name: Premium Asia Fund ARSN: 134 226 029 APIR: MAQ0635AU Management costs: Effective 1st July 2019

• Management Fee

1.33%

• Performance Fee

0.00% Currency hedging Unhedged Buy/Sell spread 0.25%/-0.25% Distribution frequency Annually Risk management Cash (max 25%), Derivatives (max 60%) Inception date: 1-Dec-09

• Min. suggested time frame

5 Years

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• The situation is more of an event rather than a trend.
• Given the extreme level of containment, we believe there will only be shorter term

impacts followed up with stimulus from the central government. (Already seen via liquidity injection in early February 2020)

Coronavirus

Source: WHO, Commonwealth Treasury of Australia Economic Roundup Winter 2003, Bloomberg, J.P. Morgan Asset Management; data as of January 2020. Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of publication, constitute our judgement and are subject to change without notice. There can be no guarantee they will be met.

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• Given the correction in equity markets was short-lived, it gave us an opportunity to

top up on domestic consumption names.

• Real GDP impact as well as tourist arrivals recovered in a V shape format.

Coronavirus

Source: Bloomberg, JP Morgan, data as of January, 2020. Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.

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• Moderation of new cases in China as expected.
• PBOC has cut 10bps to the 1 year MLF Interest Rate for financial institutions (circa 200bn

Yuan) and has injected $1.2Tr Yuan since early February 2020.

• Measurements from on the ground team is showing production levels between 20-30% of

capacity

Coronavirus

Source: Bloomberg, Chinese Government and Value Partners Ltd data as of 23rd February 2020.

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• Valuations in January 2020 were at a premium for consumption names which led

to trimming technology and consumer discretionary names waiting for valuations to come back a bit. Examples included Wuliangye and Maotai.

• We have been rotating into selective consumer names in the retail sector both

mass market and high end given attractive valuations.

• We believe Passive China won’t outperform active this year due to many of the

index constituent stocks are somewhat overvalued causing us to rotate.

• Onshore vs offshore exposure – balanced view:

– Offshore is focused on technology, healthcare and education. Offshore will be more sensitive to trade war discussion etc. – Onshore is based more on macro data. We are comfortable with 6% allocation at the moment. – We still expect strong flows into A-shares but large caps are getting crowded. For eg. Maotai is trading at over 30x pre coronavirus compared to tech names which are mid to high 20’s X.

Premium Asia Fund – Portfolio Update

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Premium Asia Fund

Data as at 31 January 2020 Source: Link Fund Solutions, Macquarie Investment Management Limited, Bloomberg Inception Date: 1 December 2009. Past performance is not indicative of future results.

0% 20% 40% 60% 80% 100% 120% Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

3-year Rolling Return

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Premium Asia Fund

Data as at 31 January 2020 Source: Link Fund Solutions, Macquarie Investment Management Limited, Bloomberg Inception Date: 1 December 2009. Past performance is not indicative of future results.

0% 20% 40% 60% 80% 100% 120% 140% Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

5-year Rolling Return

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Premium Asia Fund

Data as at 31 January 2020 Source: Link Fund Solutions, Macquarie Investment Management Limited, Bloomberg Inception Date: 1 December 2009. Past performance is not indicative of future results.

0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

7-year Rolling Return

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FUND: PREMIUM ASIA FUND PEER GROUP: ASIA EMERGING MARKETS BENCHMARK USED: MSCI AC ASIA EX JAPAN NR INDEX AUD CASH BENCHMARK: BLOOMBERG AUSBOND BANK BILL INDEX AUD TIME TO RECOVERY: NR - NOT RECOVERED, DASH - NO DRAWDOWN DURING PERIOD

Performance metrics

Source: Morningstar, Link fund Solutions as at 31 January 2020

Premium Asia Fund

1 YR 3 YR 5 YR 7 YR 10 YR

FUND PEER MEDIAN FUND PEER MEDIAN FUND PEER MEDIAN FUND PEER MEDIAN FUND PEER MEDIAN

PERFORMANCE (% PA)

19.35 16.13 13.82 11.07 9.39 6.37 12.56 10.69 11.22 8.72

STANDARD DEVIATION (% PA)

13.67 10.22 12.52 10.62 12.92 11.06 12.93 11.06 12.90 10.88

EXCESS RETURN (% PA)

4.74 1.52 1.28

• 2.45

1.10

• 1.93

0.84

• 1.04

2.59 0.09

OUTPERFORMANCE RATIO (% PA)

75.00 79.17 63.89 67.68 61.67 61.67 63.10 65.36 63.64 62.41

WORST DRAWDOWN (%)

• 7.71
• 5.87
• 16.22
• 13.72
• 21.37
• 18.64
• 21.37
• 18.64
• 21.37
• 19.35

TIME TO RECOVERY (MTHS)

5.00 NR 6.00 NR 15.00 NR 15.00 NR 15.00 NR

SHARPE RATIO

0.60 0.52 0.62 0.48 0.40 0.20 0.40 0.30 0.59 0.48

INFORMATION RATIO

1.00 0.48 0.05

• 0.37

0.18

• 0.29

0.13

• 0.14

0.37 0.06

TRACKING ERROR (% PA)

4.74 5.83 5.66 5.42 5.96 5.85 6.25 5.75 6.93 5.75

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Philippines 1% Thailand 1% Malaysia 1% Singapore 3% Red Chips 3% Cash 4% Indonesia 5% H Shares 5% A Shares 7% South Korea 14% Taiwan 19% Hong Kong 37% Materials 0.04% Utilities 0.25% Health Care 1% Insurance 1% Energy 2% Other Financials 2% Real estate 3% Industrials 3% Cash 5% Communication Services 6% Banks 8% Consumer Staples 11% Information Technology 26% Consumer Discretionary 32%

Geographical Exposure* Sector Exposure*^

Source: Link Fund Solutions, Bloomberg. Data as at 31 January 2020. ^ Classification is based on Global Industry Classification Standard (GICS). * Exposure refers to net exposure (long exposure minus short exposure) by listing. Due to rounding, percentages shown may not add up to 100%.

Premium Asia Fund

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Premium Asia Fund

Data as at 31 January 2020 Source: Link Fund Solutions Pty Ltd, Bloomberg ^Classification is based on Global Industry Classification Standard (GICS).

Portfolio Characteristics

Top 10 Holdings Industry^ Listing %

Alibaba Group Holding Ltd

Retailing

United States /Hong Kong 7.9 Samsung Electronics Co Ltd

Technology Hardware & Equipment

South Korea 6.8 Tencent Holdings Ltd

Media & Entertainment

Hong Kong 4.1 MediaTek Inc

Semiconductors & Semiconductor Equipment

Taiwan 3.5 Meituan Dianping

Retailing

Taiwan 3.3 TSMC

Semiconductors & Semiconductor Equipment

Hong Kong 3.1 China Xinhua Education Group L

Consumer Services

Taiwan 2.9 CHOW TAI FOOK

Retailing

Hong Kong 2.7 U-PRESID CHINA

Food, Beverage & Tobacco

Singapore 2.6 WH Group Ltd

Food, Beverage & Tobacco

Hong Kong 2.4

Top Contributors by Holdings (data as 31st December 2019) Average Weighting Contribution

ANTA Sports Products Ltd. 2.25% 1.80% Alibaba Group Holding Ltd. 4.34% 1.58% Samsung Electronics Co Ltd. 3.68% 1.56% Nissin Foods Co., Ltd. 2.13% 1.30% LARGAN Precision Co., Ltd. 1.67% 1.07%

Basic elements

P/E (x) 12.16 P/B (x) 1.34 Dividend Yield (%) 3.76

• No. of holdings

83

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Background:

• Nissin Foods is an instant noodles manufacturing company in Hong Kong and China, focusing on the premium

instant noodle segment. Its parent company, Nissin Japan Group is a global leading instant noodle brand, renowned for its innovation and R&D capability.

• 1H19 net profit saw a substantial yoy growth attributable to the 16% increased sales volume in China and

margin expansion in both Hong Kong and China. Operating profit was strong at 102% yoy, showcasing the continuous premiumization trend in the segment. Investment thesis:

• Nissin’s flagship products are well-recognized in HK and Southern China. Its management team has been

putting more resources on expanding their product portfolio and sales networks in China. Their works had shown some success, making Nissin the second largest premium brand in China with over 20% market share.

• We expect Nissin Foods to grow steadily in Hong Kong, with a dominant position of market shares over 65%.

Its China business will continue to grow more rapidly, riding on the premiumization trend. Key Metrics Market Cap (in USD) 965.6 million P/E* 23.3x P/B* 2.1x ROE* 7.3% D/Y* 2.0%

Nissin Foods share price since inception

*Bloomberg FY2020 estimates Source: Bloomberg, 17 February 2020

Consumption Update

Nissin Foods Co Ltd (1475.HK)

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• The timetable of the MSCI A-share inclusion has been confirmed and the weighting
• f A-shares in MSCI indices will increase from 5% factor weight to 20% by the end of

2019.

China A-Shares

Source: MSCI, March 2019

China A-Share – A sea of opportunities

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China A-Shares

Source: Gavekal

China’s onshore stock markets are attracting more foreign investors

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China A-Shares

Value Partners Track Record outperforms Passive and Active

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Premium Asia Income Fund Performance Update

As at 31 January 2020 – net of all fees One month

+1.9%

Three months

+3.2%

Six months

+4.7%

One year

+15.5%

Since launch*

+125.02%

Annualised return

+10.1%

Annualised volatility

5.1%

Portfolio characteristics as at 31 January 2020

Cash yield 8.5% Yield to maturity / put 10.8% Time to maturity, years 1.647 Modified duration, years 1.46 Number of bond positions 70

Premium Asia Income Fund Update

Source: Link Fund Solutions; Bloomberg *Launch Date: 31 August 2011 Past performance is not indicative of future results

• 10%

20% 50% 80% 110% 140% Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19

Cumulative Return (since launch - net of fees)

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Premium Asia Income Fund Update

Source: Link Fund Solutions; Bloomberg; Morningstar *Launch Date: 31 August 2011 Past performance is not indicative of future results

Performance as of 31 Aug 2011 – 31 Jan 2020

Best time period

3 months 8.66% (Dec 2011 – Feb 2012) 1 year 22.53% (Jan 2012 – Dec 2012) 3 years (p.a) 12.74% (Sep 2011 – Aug 2014)

Worst time period

3 months

• 2.65% (Apr 2018 – Jun 2018)

1 year

• 2.06% (Dec 2017 – Nov 2018)

3 years (p.a) 6.55% (Apr 2013 – Mar 2016)

Premium China Funds Management Pty Ltd Suite 39, Level 2, 330 Wattle Street, Ultimo NSW 2007 Tel: (02) 9211 3888 Fax: (02) 9211 0220 Email: info@premiumchinafunds.com.au http://www.premiumchinafunds.com.au